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Self Employed / Employee

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Lets compaare two people in my company. The first is an employee - they get a salary, and pay tax via PAYE. from their take home pay, they have to buy a car to get in and out of work, pay the petrol to get in and out, run their household. When going away for a few days, they have to pay the accommodation from their take home (after tax) pay.

The second is a "contractor" - they do the same job as the above. They bill the company for the time that they put in. As the company does not need to worry about sick pay, NI contributions, etc, the hourly rate for the contractor is understtandably higher than the employee, lets say double the employee rate.

However, the contractor run themselves as a company. In order to run their company, they have tax-deductible expenses. Their car, to get to and from their place of work, is tax deductible. The depreciation on the car is tax deductible. Their mileage to get in and out of work is tax deductible. Their home is actually their head office, so some of their household running costs are tax deductible. Because they run a company, when they go away for the weekend, they are able to run the hotel costs through the books, making it tax deductible.

Only after taking into account all of these expenses, the contractor is then taxed on the remainder.

Is this a good tax avoidance scheme, and will it become more prevalent in the future...?

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Is this a good tax avoidance scheme, and will it become more prevalent in the future...?

It's much harder to sack an employee than a contractor. Getting a mortgage might be quite tricky.

Also if you only work for one company you might fall foul of other stuff.

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I've been employed and self-employed. It's swings and roundabouts.

A common misconception among people who aren't actually self-employed is that when self-employed people claim something against tax, that means they knock its full value off the tax they pay - like if they buy £1000 worth of stationery for their business, that's £1000 off their tax bill.

But that's not the case. The £1000 is knocked off the sum that they pay tax on, so if they're taxed at 25%, they only get £250 off their tax for the £1000 stationery.

In my experience, most things can only be deducted from the sum you pay tax on, not deducted from the actual tax total.

I don't think I saved on my tax bills at all by being self-employed. The main benefit is flexibility of working. As for 'being being your own boss', that's a bit of a myth - each customer is your boss while you're involved with them.

Edited by Hyperduck Quack Quack

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Lets compaare two people in my company. The first is an employee - they get a salary, and pay tax via PAYE. from their take home pay, they have to buy a car to get in and out of work, pay the petrol to get in and out, run their household. When going away for a few days, they have to pay the accommodation from their take home (after tax) pay.

The second is a "contractor" - they do the same job as the above. They bill the company for the time that they put in. As the company does not need to worry about sick pay, NI contributions, etc, the hourly rate for the contractor is understtandably higher than the employee, lets say double the employee rate.

However, the contractor run themselves as a company. In order to run their company, they have tax-deductible expenses. Their car, to get to and from their place of work, is tax deductible. The depreciation on the car is tax deductible. Their mileage to get in and out of work is tax deductible. Their home is actually their head office, so some of their household running costs are tax deductible. Because they run a company, when they go away for the weekend, they are able to run the hotel costs through the books, making it tax deductible.

Only after taking into account all of these expenses, the contractor is then taxed on the remainder.

This is an interesting one, that lots of folks think about.

Often something needs to precipitate the change to self employment, such as being made redundant.

It also requires a change in focus and attitude as your employer would become your customer and thats a totally different ball game.

Running a small company also isnt a bed of roses, but of course it can be very fulfilling and rewarding if ot all goes well.

If you were to do this totally for the purposes of tax avoidance ( which it isnt) you would be more likely to fail.

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Their home is actually their head office, so some of their household running costs are tax deductible. Because they run a company, when they go away for the weekend, they are able to run the hotel costs through the books, making it tax deductible.

Only after taking into account all of these expenses, the contractor is then taxed on the remainder.

Is this a good tax avoidance scheme, and will it become more prevalent in the future...?

Self Employed do not get any holiday pay, or sick pay either. Like a previous poster said it`s swings and roundabouts.

I`m often told "oh you can work when you like "....No I cannot my customers tell me when I work. If I dont, I lose them as customers, and anyway I do not get wages either.

Its not tax avoidance, it is quite often worrysome, can be insecure, and comes with a ton of responsibilties towards people face to face, with no one to pass the buck onto.... :unsure:

Edited by GinAndPlatonic

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The contractor doesnt get paid for leave or sickness. Twenty five days leave a year is a lot of money to lose as is a gap without pay for sickness.

If the contractor draws a wage from his company then he gets to pay NI twice, once on his wage and once from his company as an employer (assuming that he has set up a limited company).

The only way to benefit from not being paye is if cash changes hands and is not declared (taxi drivers/shopkeepers/plumbers etc etc) contractors cant avoid anything.

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IR35 was put in place to stop this. I happen to think it is unfair but I was a contractor. The contractor does not have the same job security and they must pay for their own pension scheme and all the other benefits. Then they have to run the company and buy indemnity insurance. Personally, I think the tax advantage is deserved because of the risk and the extra work.

I heard that IR35 came about because a very large IT company working on an HMRC contract, had quite a dislike for contractors and highlighted the tax advantage to HMRC. It seems strange to me that HMRC should tackle contractors, whose money is usually all put through the company, instead of those that take cash in hand and that kind of avoidance. I also think labour prefer people to be employees.

It's a very clever piece of legistlation though. If you later decide that you weren't caught by IR35, you can't claim the tax back as you've paid it as PAYE. It's also unfair in its implementation as it's difficult to tell if you are caught or not. One man's opinion over another.

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Contractors get no paid holiday & no sick pay, have to pay the employer's NI (inc benefit in kind) and the employee's NI. In many industries they also have to provide their own equipment and pay to keep themselves up to date with any industry certification schemes. They have to provide their own training, which again in some cases (IT) can be ongoing and also quite expensive. Contractors need public liability insurance and would be well advised to have professional indemnity insurance. They also have to make their own pension provisions, receive no redundancy payments and typically work on a short (1-3 month) contract.

As an earlier posted noted, if you attempted to become self employed for tax avoidance purposes, you might well end up disappointed. If you are thinking that short-term jobs across different companies sounds attractive it can work out to be an enjoyable way to work - avoiding corporate politics and the grind with no end in sight that many permanent jobs suffer.

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Lets compaare two people in my company. The first is an employee - they get a salary, and pay tax via PAYE. from their take home pay, they have to buy a car to get in and out of work, pay the petrol to get in and out, run their household. When going away for a few days, they have to pay the accommodation from their take home (after tax) pay.

Well, I'm a contractor and do all of the above.

The second is a "contractor" - they do the same job as the above. They bill the company for the time that they put in. As the company does not need to worry about sick pay, NI contributions, etc, the hourly rate for the contractor is understtandably higher than the employee, lets say double the employee rate.

However, the contractor run themselves as a company. In order to run their company, they have tax-deductible expenses. Their car, to get to and from their place of work, is tax deductible. The depreciation on the car is tax deductible. Their mileage to get in and out of work is tax deductible. Their home is actually their head office, so some of their household running costs are tax deductible. Because they run a company, when they go away for the weekend, they are able to run the hotel costs through the books, making it tax deductible.

Really? Some may do this, but I don't know any.

My car is mine, not my companies so it's not tax deductible, and I don't claim mileage as I've been with my current client for more than 6 months. What I get for using my home for my business is next to nothing (£30 pa I think).

Only after taking into account all of these expenses, the contractor is then taxed on the remainder.

Is this a good tax avoidance scheme, and will it become more prevalent in the future...?

If you have proof that this contractor is doing this, then shop them in as you would for any business avoiding tax, but please don't tar us all with the same brush as the majority of us try to run a tight ship.

Also I guess on the other hand, if not for UK contractors and with permanent jobs becoming harder to find, would you prefer EU contractors to come in and not pay any UK tax at all?

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The contractor doesnt get paid for leave or sickness. Twenty five days leave a year is a lot of money to lose as is a gap without pay for sickness.

I've only just noticed that the Will And Kate Official Rejoicing Day For The Plebes will be a lean time for contractors - 5 bank holidays over 2 weeks means no cash coming in*.

* I'm a contractor, and I'm doing well financially - but it's true that "permies" often underestimate the downsides. If it was that easy, everyone would be doing it!

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However, the contractor run themselves as a company. In order to run their company, they have tax-deductible expenses. Their car, to get to and from their place of work, is tax deductible. The depreciation on the car is tax deductible. Their mileage to get in and out of work is tax deductible. Their home is actually their head office, so some of their household running costs are tax deductible. Because they run a company, when they go away for the weekend, they are able to run the hotel costs through the books, making it tax deductible.

Sounds like a lot of misconceptions of contracting.

If you have a COMPANY car, then it's tax deductible. The contractor's company can only pay regular mileage rates on a personal car, and that's only for the first 24 months in one location. If you have a company car then you need to pay personal tax on it the same way as anyone else.

SOME household costs are tax deductible, but only a very small amount in comparison to the houshhold bills.

The contractor's company can't jsut pay for a weekend, unless you can justifiably call it a business expense. So yes, a conference in Las Vegas could be claimable, just as it would for a permananet employee. A weekend in Brighton to party wouldn't be claimable.

You also forgot add the various insurance policies and accountant fees, which can cost £2-3k or more per annum, and the employers NI payments (13.8% at the moment?) which is BEFORE the contracator sees any money themselves.

Oh, and if you make a profit, then there is corporation tax as well, wihch is 20% of any profit after costs (salaries are a cost, dividends are not)

OK, there are benefits, don't get me wrong, but there are also many downsides: sick pay, holiday pay, no work=no pay, etc. which permanent employees seem to forget.

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I latest amusing story was of a bird I know who always moaned about how much contractors got paid. She then got made reduandant and got 20k tax free.

Ups and downs. I have many people who I have discussed this with. I tell them one simple thing ?

Could you cope with not having one penny of income for 6 months+ ?

If they say yes then they should perhaps try contracting - everything else considered. If they say no then they should not even think about it. Simple as that.

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Lots of people moan about contactors but the loadest are usually the least likely to give it a try.

Tax deducatable expenses look attractive but anything you claim for should be used solely for the purpose of work. You can't just "take a weekend away" and claim it on expenses so getting the tax relief.

Cars and milage allowances often appear a safe bet, but if you run a company car, the company pays for the car and claims tax back as appropriate but the employee is then taxed on the benefit of that car which cab be several thousand of pounds a year. The simplest way is to pay to run a car priately but then pay a milage allowance for any miles done on company business, even then the normal commute can only be claimed for upto 2 years and I believe that if you know the contract is likely to extend beyond 2 years you must stop claiming this immediately, not at the 2 year cutoff.

What you can claim for using your home is pretty minimal and further down the line you can run into problems with council tax/business rates and even capital gains tax.

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Lets compaare two people in my company. The first is an employee - they get a salary, and pay tax via PAYE. from their take home pay, they have to buy a car to get in and out of work, pay the petrol to get in and out, run their household. When going away for a few days, they have to pay the accommodation from their take home (after tax) pay.

The second is a "contractor" - they do the same job as the above. They bill the company for the time that they put in. As the company does not need to worry about sick pay, NI contributions, etc, the hourly rate for the contractor is understtandably higher than the employee, lets say double the employee rate.

However, the contractor run themselves as a company. In order to run their company, they have tax-deductible expenses. Their car, to get to and from their place of work, is tax deductible. The depreciation on the car is tax deductible. Their mileage to get in and out of work is tax deductible. Their home is actually their head office, so some of their household running costs are tax deductible. Because they run a company, when they go away for the weekend, they are able to run the hotel costs through the books, making it tax deductible.

Only after taking into account all of these expenses, the contractor is then taxed on the remainder.

Is this a good tax avoidance scheme, and will it become more prevalent in the future...?

Sorry to puncture your envy but you are demonstrating ignorance of tax law, company law, and employment law.

Firstly, some contractors work on a self-employed basis; other contractors work for (are employed) by their own companies. I can explain what happens in the latter case - though this info may not be quite up-to-date.

There are good business reasonsfor operatinng through a Limited liability company. Some clients will not deal with self-employed contractors for fear that the contractor will be regarded as a de facto employee.

The contractor('s company) is paid more than a normal employee, and is more likely to fall into a higher income tax bracket, paying more tax and at a higher rate.

If the contractor is caught by IR35 tax rules, then 95% of their businesses turnover is treated as personal income, and is subject to NI and income tax , and employer's NI (another 12% or so) Anything that is tax deductible cannot exceed the 5% allowed. (This may have changed in recent years). So if you earn £100K and have £10K expenses, only £5K of that at the most, is tax-deductible. The rest of the business expenses are paid out of taxed income (including employers NI). IR35 effectively precludes paying oneself through dividends.

Travel expenses to a customer's site can only be claimed up to the time the contractor knows they will be working there for 6 months or more. So for example, if the contract is for 7 months at the outset, travel costs cannot be reclaimed. If the original contract is for 4 months, and at the end of 4 months is extended by 3 months, the second 3 month's expenses cannot be reclaimed. (This period may have increased from 6 months to 2 years - not sure)

Also, as it is less likely the contractor will work close to the customer (one has to go where the work is) the travel is likely to be longer, and take more time. Alternatively, the contractor will have to pay for local acccomodation.

Unlike a 'normal' employee the contractor will not get relocation expenses from the client. Contractors are typically skilled professionals, and it is common for permanent employees with equivalent skills to get relocation expenses paid tax free. not so, the contractor.

Use of part of a home is tax-deductible (after all, part of the home is being used for business), but there can be CGT implications when the home is sold after it has been used for a business. The rules can be complex, as with other business accounts - so add the cost of an accountant to the costs of runing a small business.

You say "Their car, to get to and from their place of work, is tax deductible. The depreciation on the car is tax deductible. Their mileage to get in and out of work is tax deductible." HMRC stipulates a fixed rate depending on milage and engine size which can be used to calculate allowable /taxable benefit., if the car is owned by the contractor and not the contractor's company. If the car is owned by the contractor's business, and is available to the contractor for personal use, it is a taxable benefit - just like a 'normal' employee with a car from their employer. No difference there. If the contractor has a car where an equivalent 'normal' employee would not typically get one, the contractor is simply spending his (heavily taxed) personal income on the car, or the car is a (taxable) benefit from his own company.

Training - contractors are normally hired for their existig skills. Training is only tax-deductible if it is necessary for the job, and a contractor will not get a contract unless they already have the skill for the job. This Catch-22 means that most training is not tax deductible in practice. If you are in IT, expect to pay a few £K for some courses - out of your own pocket. The 'normal' employee gets training free, and it is tax-free. If the course is away from the place of work, accomodation is paid for by the employer, tax-free; the contractor pays for accomodation themself, and out of taxed income if caught by IR35.

Not looking so rosy for contractors, is it?

Now let's look at business expenses - depending on the business, the contractor will need to take out public liability insurance, product liability insurance, and/or employee insurance if they employ someone to help with accounts, etc (the latter would be unusual for a 1-person contractor business). There is also insurance on business equipment such as computers.

You are right about contractors not getting sick pay; add to that list paid holiday, pay during training, and maternity/paternity leave. Sickness is best covered by insurance - but that is another cost.

You are keen to list benefits that a contractor enjoys (but are still taxable) but you ignore that ordinary employees enjoy often staff discount schemes, social club memberships, company pension contributions, subsidised canteens, Xmas parties, membership fees for professional bodies, and many other benefits.

The contractor will have to deal with bookkeeping and filing accounts, VAT, Annual returns, and related legislation depending on the type of business. This may not be too onerous, but if it is, it takes time - or you have to pay an accountant to do it for you.

You claim "Because they run a company, when they go away for the weekend, they are able to run the hotel costs through the books, making it tax deductible." Only if this is a legitimate business expense, and this would be equally true of a normal 'employee'. If you think that contractors fiddle tax and employees don't, you are merely demonstrating ignorance and prejudice. God knows how many employees steal from their employers, for example.

Then there is advertising, or rather, the slog and travel expenses involved in finding work - and if you have any reasonable savings, having no contract does not mean you can claim unemployment benefits, despite having paid employees and employer's NI.

Hand -in- hand with this is the amount of time a contractor is not earning money through a contract. At the moment, contracts are particularly hard to come by, and rates in some sectors have dropped 30-40%.

If the contractor is not caught by IR35, it is because they are running a business that clearly is not akin to being employed by their client. Typically, this is by bearing all risk in fulfilling a contract and so on.

The bottom line is, if you are good at what you do, are prepared to bear the burden of looking after your own career, training, and the risk involved in running your own business and depending on your good health, have a go at contracting. Nothing is stopping you being a contractor except your abilities and risk-aversion. If you think it's an easy life, then you probably don't appreciate what is involved in running a business, including additional stress, work and time. If you haven't got the balls, fine, be an employee.

Edit to add: Yes, the fact I have the time to write all this is because I am between contracts. If you are employed, you are earning a lot more than I am at the moment (£0). Could you cope with that on a regular basis? :rolleyes:

Edited by happy_renting

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I found it only worked for me once I moved a long way past the 40% tax bracket and close to 6 figs. This can change but you would need to be very "creative" with your accounting at a lower level to make it worthwhile.

I would never do it but playing about with directors loans etc can yield some big savings

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You dont have to be 'creative' with your accounting to make it worthwhile. You just need to a get a decent day rate - and be good with money.

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Contractors getting twice the permie hourly rate?, I wish!, at the moment the only way I can really stay ahead of the permies is by doing 50+ hours a week.

Permie designers are on about £43k a year where I am at the moment, Given 25 days holiday plus statutory holidays(37.5 hours a week x 52weeks-30 days off x 8 hours a day=1680 hours a year, divided by their wage = about £25.59 an hour + employers national insurance, I'm on £26 an hour, 26x40(hours)x50(weeks)=52k, I get no paid holiday, no sick pay and at the moment I'm going through an umbrella company so I'm getting stung for full paye. I can claim mileage at 40p a mile and 15 quid for lunch a day when I do more than 10 hours a day but thats about it. When I did have a ltd company there little to no benefit in having a company car, In my line of work there are no consumables to speak of, post its and stamps!.

I will however be setting up a new Ltd company come april, the main reason for doing so will be to avoid the higher tax band.

And as for Ir35 I've yet to meet anyone who can say clearly whether they are ok or not, I know two chaps that have been 'investigated' but nothing came of it.

I believe it was to try and stop companies replacing permanent employess with one man band Ltd companies and not paying any NI for that 'employee', Basically the contractor pays themselves minimum wage to pay minimum tax and NI and takes the profits as dividends, this is usally spread between the director and company secretary, again to try and avoid paye and NI. Part of IR35 is a 24 month site based rule but all that happens is that contractors bill each other to obfusicate the paper trail.

I might be slightly off with some of the above, but then I'm not an accountant. :D

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Just to point out, I am self-employed and do several different kinds of work, sometimes IT contracts, sometimes more creative industries stuff.

My contract rate hasn't really gone up since 1998. OK, if I had consistently worked in banking I could probably have seen a better rate, however I hate working in the bloody banks. So guess, compared to house prices, my real earnings from contracting have halved in that time.

Been contracting for 15 years, I'll never go back, even after bad years like the last one where I made a loss because I couldn't find suitable work and my other work areas dried up at the same time.

The golden days of buying a new car with a switch card on my earnings have long gone, its more of a slog now.

But its my choice, I choose lower paying work so I can be more flexible, not work in an investment bank and be treated with some status rather than just treated as a contractor. For me its a price worth paying, but I can say that because of my somewhat bohemian approach I don't have a fat pension, but then you have the freedom to do what you want.

Edited by TheBigNothing

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Lets compaare two people in my company. The first is an employee -

....

The second is a "contractor" -

....

Their car, to get to and from their place of work, is tax deductible. The depreciation on the car is tax deductible. Their mileage to get in and out of work is tax deductible. Their home is actually their head office, so some of their household running costs are tax deductible. Because they run a company, when they go away for the weekend, they are able to run the hotel costs through the books, making it tax deductible.

You cannot claim for car running costs AND milage - the standard milage rate is supposed to include all running costs. Claiming for room in house as office mean that you can lose part of your main home capital gains tax exemption. Also you cant claim living costs that are not directly related to travelling for work, in particular anything at the weekend would be very hard to get past HMRC.

Basically whoever your talking to is painting a very rosy picture and liable to end up with a bill for a few 10's of thousands of £ if he/she is not careful.

The main gain for working as a contractor is actually paying corporation tax instead of income tax on dividends.

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You cannot claim for car running costs AND milage - the standard milage rate is supposed to include all running costs. Claiming for room in house as office mean that you can lose part of your main home capital gains tax exemption. Also you cant claim living costs that are not directly related to travelling for work, in particular anything at the weekend would be very hard to get past HMRC.

Basically whoever your talking to is painting a very rosy picture and liable to end up with a bill for a few 10's of thousands of £ if he/she is not careful.

The main gain for working as a contractor is actually paying corporation tax instead of income tax on dividends.

Dead right. I can only claim mileage. Actually because I rent, thats an advantage, I can claim back a good chunk of the rent because I use two rooms for my business. No worries about capital gains.

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You cannot claim for car running costs AND milage - the standard milage rate is supposed to include all running costs. Claiming for room in house as office mean that you can lose part of your main home capital gains tax exemption. Also you cant claim living costs that are not directly related to travelling for work, in particular anything at the weekend would be very hard to get past HMRC.

No you dont claim for the room, you claim a percentage of utility bills according to what percentage of your house your office is. Also you can claim on all fixtures and fittings.

Working from home saves me an enormous amount of money in travel expenses, at least £300-400 a month

Edited by cardiffone

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  • 276 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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